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    Question

    A 10-year Government of India bond with a face value of

    ₹1,000 and a fixed coupon rate of 7% is currently trading in the secondary market at ₹1,050. Which of the following statements is correct regarding this bond?
    A The current yield of the bond is exactly 7%. Correct Answer Incorrect Answer
    B The bond’s Yield to Maturity (YTM) will be higher than 7%. Correct Answer Incorrect Answer
    C The bond’s Yield to Maturity (YTM) will be lower than 7%. Correct Answer Incorrect Answer
    D The market interest rates have likely risen since the bond was originally issued. Correct Answer Incorrect Answer
    E The bond's coupon payment will increase to match the current market price. Correct Answer Incorrect Answer

    Solution

    When a bond's market price (₹1,050) is higher than its face value (₹1,000), it is said to be trading at a premium. Because bond prices and yields have an inverse relationship, a higher price results in a yield that is lower than the fixed coupon rate. In this scenario, the investor pays more upfront for the same fixed interest payments, thereby reducing the effective return or YTM.

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